K2 Advisors Third Quarter Hedge-Fund Strategy Outlook

Heading into the second half of the year, pandemic concerns are not completely in the rear-view mirror. The speed of recovery may vary among regions due to disparate global vaccine distribution leading to potentially divergent central banks policies, according to K2 Advisors. Brooks Ritchey and Robert Christian provide the team’s third quarter (Q3) hedge-fund strategy outlook.

Q3 2021 Outlook: Summary

With society and economies in transition, investors must underwrite to a wide range of potential outcomes. Progress on vaccinations, central banks beginning a cycle of tightening policy, and earnings growth are important variables that are difficult to gauge. Given the uncertainty embedded in the underlying core markets, we believe it is prudent to focus hedge fund investments on alpha generating non-directional strategies.

Strategy Highlights

  1. Relative Value: A robust primary market represents a tailwind for convertible bond managers. More bonds to underwrite, improved liquidity and trading opportunities, and the ability to flip bonds into the secondary market are among the positives.
  2. Global Macro: Managers focused on macro factors may benefit from a rich opportunity set as data releases and policy paths continue to play a critical role across markets.
  3. Insurance Linked Securities (ILS): Flows into the market brought on a very active second-quarter (Q2) new issuance period. While spreads have tightened, they remain attractive versus corporate high yield entering the key summer ILS risk period.



Long/Short Equity Active, long-duration, fundamental long/short equity managers may be challenged by the market’s volatile rotations. Investors are focused on macro, and companies are navigating toward “back to normal” while their stocks simultaneously trade at high valuations.
Relative Value Favorable outlook for convertible and volatility arbitrage given continued strong issuance and inefficient pricing. Outlook for fixed income arbitrage is more muted due to central banks’ success in depressing global rate volatility.
Event Driven Expect continued active supply of corporate events due to ample liquidity, peak valuations, and continued management team incentives to grow market share and earnings.
Credit Spreads remain near historic tights, which favors trading-oriented strategies such as long/short credit at the expense of more directional ones such as distressed and direct lending. Pricing in structured credit remains inefficient, and managers expect dispersion to persist in certain sectors.
Global Macro Macro developments continue to drive global markets with managers focused on these factors facing a potentially rich opportunity set over the medium term. Shifting market narratives around future policy paths may favor nimble and opportunistic trading styles.
Commodities Tighter supply and demand will likely lead to more relative value trading opportunities. We are encouraged by the discipline of many long/short commodity managers as they are tightly managing capacity.
ILS June 1 renewals continued the trend of higher reinsurance pricing over a multi-year period. While spreads have tightened, they remain attractive versus corporate high yield entering the key summer ILS risk period. As Q3 is peak hurricane season, its outcome will have an influence on forward pricing.